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Bernanke takes the stand: Has anything changed since the AIG bailout?

Nicole Duignan

Today Former Federal Reserve Chair Ben Bernanke will take the stand as testimony continues this in former AIG CEO Maurice “Hank” Greenberg’s lawsuit against the U.S. Government. Greenberg claims the government takeover of 80 percent of the insurance giant’s shares was illegally onerous to shareholders. Greenberg was the largest shareholder in the insurance firm at the time of the $85 dollar taxpayer- funded deal in 2008.  In his testimony before federal court in Washington D.C., Former Treasury Secretary Hank Paulson stated “It was important that terms be harsh because I take moral hazard seriously.”

Nomi Prins, Author of “All the President’s Bankers” and a Senior Fellow at Demos calls the suit “sad,” Prins points out that at the time the insurance giant had just lost its AAA credit rating, and as a result all the banks insured by AIG lost their protection because of the downgrade; the New York Federal Reserve was forced to step in and offer the bailout. “AIG took on the risk…AIG may have its issues with the big banks that were its clients at the time but the reality is the risk worked wrong, the rating went down, and they were exposed, as were the banks.” The actions of The Federal Reserve and the U.S. Government were meant to “save the big banks and not necessarily to make a statement against AIG.”

Greenberg’s Attorney David Boies, asserts that the terms of the government assistance received by AIG were much more onerous than bailouts received by other big banks during the financial crisis. When asked if this was to avoid a crisis of confidence in the financial system, Prins says weaknesses in the overall system--as opposed to at specifically at AIG-- were exposed during the company’s brush with bankruptcy. She highlights a “co-dependency in the financial system amidst those big banks that have their risks associated with each other…if one of them didn’t get back their margin payments than the other ones weren’t going to get them back and yes, that would cause an unraveling of their positions and a necessity to post some very large losses at a critical period.”

Former U.S. Treasury Secretary Timothy Geithner was in the hot seat the following day; he testified AIG’s collapse would have been “catastrophic” for the American banking system.

“On the one hand it was political alliances that enabled them to get the bailout, on the other it was the fact they were too big to fail and as a system it was too big to fail and it still remains so” says Prins. She remains unconvinced that any meaningful change has taken place since the federally funded bailouts of 2008. “The fact that we’re six years on and talking about this and have adopted the same policies through these six years the same policies…means we’re still in a very precarious situation.”